Product Portfolio Management
– Managing a Mix of Customized and Standardized Products
Henrik Jansson
Department of Industrial Management & Logistics Production Management
Lund Institute of Technology Lund University
Acknowledgements
Family comes first – I would like to thank my family for all the support during the writing of this Master Thesis. In times of setbacks the moral support from loved ones is indispensable.
I would also like to thank my supervisor at Lund University, Ola Alexanderson, for his advices and for his ability of bouncing ideas that has been truly helpful throughout this whole process.
Special thanks are also dedicated to my supervisor at ABB Machines in Västerås, David Bjerhag, who in spite of his packed schedule helped me gain insight in ABB Machines and contributed to this thesis with useful advices.
Abstract
Title: Author: Supervisors: Background and problem description: Purpose: Methodology:Product Portfolio Management – Managing a Mix of Customized and Standardized Products
Henrik Jansson, Lund Institute of Technology, Lund University David Bjerhag, Manager Sales & Project Execution, ABB Machines Ola Alexanderson, Department of Industrial Management & Logistics, Production Management, Lund Institute of Technology, Lund University
ABB Machines in Västerås, Sweden develop, sell, and manufacture generators and large electric motors worldwide. During the past years new competitors have emerged from a lower output range and some customers have reduced their demands in order to reduce the generator costs. In order to meet these changes in the market ABB Machines has developed a new pre-engineered standardized generator that allows for easier purchase and more efficient production. This new generator, here referred to as Basic, will have less flexibility compared to the current range of generators but provide the same robustness and quality.
ABB Machines needs help with integrating the new product range into its existing product portfolio. There are a number of challenges with regards to marketing the new product both internally and externally that need to be covered by this thesis.
The purpose of this thesis is to answer the question; How should the new product rage, Basic, be integrated into ABB Machines existing product portfolio? The aim is to provide useful recommendations to ABB Machines of how, in the most successful way, manage this product integration.
After some background information about ABB Machines in Västerås was gathered through interviews a theoretical framework was created from various books, articles, and journals related in different ways to the subject. The theoretical framework was used as a foundation for several case studies conducted at different companies. The companies were selected due to their successful product introduction and similarity to ABB Machines’ situation either based on product, marked position, branch or other. The case studies were based on interviews and the companies were analyzed with regards to their processes and their ability to overcome the obstacles that ABB Machines is facing.
Delimitations:
Conclusion:
The case studies together with the theoretical framework were used to determine the preferred company behavior and after an analysis of ABB Machines in Västerås they were used to make recommendations of how to act in the situation that ABB Machines in Västerås was in at the time of writing.
A few potential issues have been left out of this thesis for various reasons. The risk that the new product would cannibalize on the existing products’ volumes is one of them. Another issue, strongly related to the above, is to what extent the standardized generator should be sold in terms of how large part of the total sales should consist of Basic orders in the long run. This is a question for ABB Top Management and will also be left out of this thesis. Lastly, how to select new suppliers related to the new product and ensure their appropriateness is an issue of importance, but will not be discussed in this thesis.
In order to manage both standardized and customized products the internal processes need to be separated and clearly documented. If the same processes are kept for both products ABB Machines risks that the standardized products will be too time consuming and therefore too costly. Without separated processes it will also be difficult to maintain the standardized products’ lesser flexibility and stay within the borders of the limited options, which is essential for product success.
When it comes to external marketing the limitations of the standardized products must be clearly communicated to the customers and what is included in a standardized order must be stated in an obvious way in the sales process to prevent discussions and confusions later in the project. If the above is managed properly and no confusion about the differences between the standardized and the customized products arises the price difference between the two can be explained through the advantages of standardization, which according to the studied companies should be well known among companies within ABB Machines industry.
Table of Contents
1 Introduction……….9 1.1 Background………..9 1.1.1 About Basic……….9 1.2 Problem Description………..10 1.3 Purpose ………..11 2 Methodology………..12 2.1 Research Strategies……….12 2.1.1 Method of selection………122.1.2 Generalization of Case Studies………..………13
2.2 Types of Information………..…....13 2.2.1 Written sources………...…………...………14 2.2.2 Interviews………..………15 2.3 Criteria of Quality………..………16 2.3.1 Validity………..…………16 2.3.2 Reliability………...…16 2.4 Procedure………16 2.4.1 Delimitations………..18 2.4.2 Alternative methods………...18 3 Theoretical Framework………19 3.1 Introduction………19
3.2 Introducing a New Product………19
3.2.1 Microenvironment analysis………....20
3.2.2 Macroenvironment analysis………...………....20
3.2.3 Should the new product strategy be market or technology driven?...20
3.2.4 Key factors contributing to new product failure………21
3.2.5 Importance of communication in product introduction……….21
3.3 Product Introduction in Extended Enterprises………...21
3.3.1 Trust-based relationships………...21
3.3.2 Communication within extended enterprises……….22
3.3.3 Collaborative tools……….22
3.3.4 Possible goal conflicts………...23
3.4 Product Positioning………23
3.4.1 The product positioning steps………24
3.4.2 Risky Positions………..26 3.4.3 Exemplar-based positioning………..26 3.4.4 Abstraction-based positioning……….………..26 3.4.5 Reverse positioning……….………..27 3.5 Market Segmentation……….………27 3.5.1 Implementation problems……….….………27
3.5.2 The stages of market segmentation………..….………27
3.7 Customer Behavior………30
3.8 Standardization………..…………31
3.8.1 Outpacing strategies………..………31
3.8.2 The managerial implications of an outpacing strategy…………..……32
3.9 Mass Customization………..…….33
3.9.1 The product platform……….33
3.9.2 Methodological enablers for mass customization………..33
3.9.3 Time-based manufacturing………33
3.9.4 Customer Elicitation………..34
3.9.5 Modularized production………35
3.9.6 The organizational enablers for mass customization……….35
3.10 Summary in Points………..………….36
4 Case Studies………37
4.1 Introduction………37
4.2 Mass Customization Case 1………...38
4.2.1 Introduction………38
4.2.2 About the company………38
4.2.3 Results from the case……….39
4.2.4 An analysis of practice vs. theory………..40
4.2.5 The authors’ conclusions………...…41
4.3 Mass Customization Case 2………....42
4.3.1 Introduction………....42
4.3.2 About the company………....42
4.3.3 Results from the case……….………....42
4.3.4 Summary of important factors………...45
4.4 Mass Customization Case 3………...46
4.4.1 Introduction………...46
4.4.2 Product perspective………...46
4.4.3 Process perspective………...46
4.4.4 System perspective………...47
4.4.5 Implications from the case study…………..………....48
4.4.6 Concluding remarks by the authors………..………....48
4.5 Conclusions From the Mass Customization Cases………...49
4.6 The Volkswagen Commercial Vehicles Case………...50
4.6.1 Introduction………..50
4.6.2 About the company………..50
4.6.3 Interview Volkswagen Commercial Vehicles………..51
4.6.4 The author’s conclusions………..………55
4.7 The Scania Case………56
4.7.1 Introduction………..56
4.7.2 About the company………..56
4.7.3 Interview Scania………...57
4.7.4 The author’s conclusions………..………64
4.8 The Solar Turbines Inc. Case………66
4.8.2 About the company………66
4.8.3 Interview Solar Turbines Inc. ………...68
4.8.4 The author’s conclusions………..…….………73
4.9 The Siemens Industrial Turbomachinery Case………...…………...75
4.9.1 Introduction………...75
4.9.2 About the company………...75
4.9.3 Interview Siemens………..………...76
4.9.4 The author’s conclusions………...………...81
4.10 Conclusions……….83
5 ABB Machines Analysis………...86
5.1 Products………86
5.2 Processes……...………...86
5.2.1 The sales process………..86
5.2.2 The project management process……….87
5.2.3 The documentation………...88
5.2.4 The production process………88
5.3 Organizational Culture……….89
5.4 Customers’ Perception……….90
6 Final Conclusions and Recommendations………91
6.1 Watch Over the Processes………91
6.2 Implement Supportive Tools………92
6.3 Realize the Importance of Communication..………93
6.4 In the Production……….….………95
6.5 Employees Should Facilitate Product Success.………96
7 Discussion………97
7.1 Difficulties………...97
7.2 Future Studies………..97
8 References………...98
8.1 Book and Articles………98
8.2 Websites………102
8.3 Case Studies………..103
1 Introduction
1.1 Background
ABB Machines in Västerås, Sweden is part of the global corporate group ABB Ltd. with headquarters in Zürich, Switzerland. ABB Ltd. is mainly operating in the power and automation technology areas and is one of the largest engineering companies in the world.
This thesis is written on behalf of ABB Machines in Västerås. ABB Machines develop, sell, and manufacture generators and large electric motors worldwide within the output range 100 kW – 70 MW. It has about 3 300 employees out of the 120 000 employees of the ABB Group.
ABB Machines has manufacturing facilities in Sweden, Finland, Italy, Russia, Estonia, Czech Republic, India, South Africa, and China and has sales offices in over 90 different countries. Most of the production is for export and the generators are used for industrial size power generation. The product line and product portfolio is used by large industries and all sales are done to large global OEMs or industrial end users. ABB is currently the market leader for this size of generators.
During the past years new competitors have emerged from a lower output range and some customers have reduced their demands in order to reduce the generator costs. This is especially true for the lower output powers. In order to meet these changes in the market ABB Machines has developed a new pre-engineered generator range that allows for easier purchase and more efficient production. This new generator range, here referred to as Basic, will have less flexibility compared to the current range of generators but provide the same robustness and quality.
1.1.1 About Basic
One of the main purposes with the Basic generator is to increase ABB Machines’ sales volume through, from a customer’s perspective, a more attractive price. In order to offer a more competitive price, significant reduction of the total production cost of the product needed to be made. These saving has been made through standardization of the generator which will reduce the time spent on mechanical design, electrical design, and project management to name a few. The generator will also be easier to produce and have shorter lead time, which will reduce the tied up capital and the direct production cost.
The shorter lead time is a positive attribute that can be used to attract new customers. The reduction of lead time will be significant compared to ABB Machines existing products, the AMS.
Basic has been developed with a base design and numerous additional options to correspond to 80 percent of the identified customer needs within that machine size. The generator has primarily been designed to fit gas turbines but will also be offered on the steam turbine market.
1.2 Problem Description
ABB Machines in Västerås needs help with integrating the new product range, Basic, into its existing product portfolio. There are a number of challenges with regards to marketing the new product both internally and externally in order to keep the price-level of the existing products while offering a competitive product when the demands from the customers are lower. Some of these potential issues can be quite costly if they are not handled properly.
The customers do not realize the differences between Basic and ABB Machines previous products AMS
When the customers do not fully understand the limitations of Basic there is a risk that they will order a standardized generator even though they really need a custom designed generator. In those cases ABB Machines will not be able to fulfill the customers’ needs and complications will arise.
There is also the case when the customers are aware of the limitations but order the Basic generator with the aim of getting a customized generator at the price of a standardized.
• How should ABB Machines explain the price difference between Basic and AMS, i.e. the price difference between a standardized and a customized generator? • How should ABB Machines act when the customer tries to make an ordered Basic
generator customized?
ABB Machines has difficulties with managing the different products internally
When ABB Machines’ employees do not fully understand the differences between Basic and AMS similar issues can arise. Also in this case an ordered Basic generator can end up being a customized generator, which will lead to significantly lower profit margins and difficulties with keeping the promised delivery time. Delivery delays can in turn create other problems for ABB Machines in the form of disturbance in the production flow that can affect other projects because of reprioritization.
• How should the ABB Machines management assure that Basic is managed properly internally?
The general problem that this thesis aims to solve is:
How should the new product rage, Basic, be integrated into ABB Machines existing product portfolio?
1.3 Purpose
The purpose of this thesis is to answer the question; How should the new product rage, Basic, be integrated into ABB Machines existing product portfolio?, by creating a theoretical foundation relevant for the purpose and investigating how different companies have managed similar situations successfully in practice. The result from the theoretical framework together with the finding from the case studies is to be used as a basis for recommendations to ABB Machines.
This thesis is primary for students and researchers interested in standardized product integration in a business-to-business environment and for the management and employees of ABB Machines in Västerås.
2 Methodology
2.1 Research Strategies
According to Robson (2002) all different research strategies can be divided into two different categories, fixed and flexible strategies. The fixed strategies are pre-decided procedures of how the research is supposed to be executed and what information is to be gathered. When this type of research is performed the result can often be presented in form of numbers. The flexible research strategies’ structure will instead appear slowly as the information is being gathered and it is not possible to on beforehand decide how to carry out the study. This type of research will be presented in words rather than numbers (Robson, 2002).
When this study was carried out it was not in advance decided exactly what information was to be gathered or how the study was to be structured, so accordingly a flexible research strategy was used. The initial gathered information has highly affected the continued work in many different ways. As various theories were studied more possible approaches to answer the research question were formed just as the lack of certain information created the need for alternate approaches. The results of the study has been presented in words, which also indicates the flexible research strategy used.
One of the most common research strategies is the case study (Denscombe, 2000). This strategy is often used in small-scale studies, where one object is studied in depth. According to Denscombe (2000) case studies are preferable when complex situations, relations, or processes that cannot be covered by other methods are studied. This is one of the reasons that case studies are included in this thesis. Due to the highly complex problem that ABB Machines is facing, case studies was the most relevant way to study the situation and bridging the gaps that the theory left open.
2.1.1 Method of selection
The method of selection used in this thesis is subjective selection, which according to Denscombe (2000) can be defined as when the units are picked by hand based on what is known about the target population. These units are considered to be the one that can contribute the most valuable information and are seen as relevant for the research topic. Subjective selection was made when the interviewees at ABB Machines were chosen. The interviewees were handpicked based on my supervisor at ABB, David Bjerhag’s suggestions of who would be able to contribute by sharing his or her expertise within a certain area.
Also when choosing companies to study subjective selections were made. The companies were handpicked to suit ABB Machines’ situation so that each and every one of the case
studies would add value to the thesis in its own individual way. This selection of companies was unfortunately limited due to some companies’ unwillingness to contribute and the lack time that is always a limiting factor for these types of researches.
2.1.2 Generalization of Case Studies
It is easy to understand that a selection has to be large enough to be generalizable. This is an issue for case studies where the selection often is relatively small, which makes generalizations of case studies easy to question. The following questions are commonly asked in those situations (Denscombe, 2000):
• How representative is the case?
• Are not the results specific for this particular case and its circumstances? • How can a generalization be done based on a small selection of units?
Case studies, as opposed to survey research, are not statistically generalizable, but analytically generalizable. It means that a case study is compared to compiled theories and when a similarity is found, the results are analytically generalizable (Yin, R. K., 1994).
In this thesis, which consists of several case studies, the cases have been compared to theory to find similarities and through them finding generalizations. The highly complex case of ABB Machines did not leave the possibility open to find a lot of applicable theories since the most theories within the areas sought were in first hand in regard to companies offering consumer products and not business to business relations as in the case of ABB. Therefore, three case studies conducted by other authors were at first used to find generalizations. These generalizations among with other potentially successful theories created the foundation for four other case studies conducted by the author of this thesis. Those four cases, in which the companies were carefully chosen due to their individual similarity to ABB Machines’ situation, were compared to the previous three cases and the theory to generate recommendations for ABB Machines.
2.2 Types of Information
All research are generally divided into two categories; qualitative and quantitative research. It is not always easy to part the two and many research projects use both types of research. What determine the difference between the two is where the emphasis of the research is put and how the data is analyzed. The two categories can be described as follows:
• Qualitative research – The analysis is presented in words and often gives a detailed description of the reality. The level of details that is included determines the
possibility for outsiders to interpret the researchers result and determines whether the result can be applicable in other situations. Qualitative research is also flexible and the method tends to have a holistic view (Denscombe, 2000)
• Quantitative research – The analysis is presented in numbers so that comparisons and relations can be studied with statistical methods. This type of research is often fixed, as opposed to the flexible qualitative research, and has an atomistic view instead of a holistic (Denscombe, 2000).
This thesis that results in, with words described, recommendations to ABB Machines of how to manage the introduction of a standardized product, gives a holistic view of the complex situation. The above supports the choice of a qualitative research.
2.2.1 Written sources
When it comes to scientific research it is important that the researcher investigates what findings within the area has been made by other researchers. At this stage the written sources commonly constitute the main part of the information sources. The reason for that is to avoid repeating already performed research, to complement other research, and provide understanding for the reader of what theories lie behind the research.
The above-mentioned procedure was applied in this thesis for the very reason explained among other reasons. The written sources that were used in this thesis were books, journals, Internet sources and articles.
Books
The books used as information sources should be carefully selected since not all the books have credibility. One thing that indicates the credibility of a book is the reliability of its publisher. If a book is published by a well-known and well-established publisher, chances are good that the content of that book is reliable. It is also a good sign if the book has been released in many editions or if the book is referred to by many other sources. The books referenced to in this thesis are all published by well-know publishers and some of them are used as course literature at Lund University. One Doctorial Dissertation and one Master Thesis were evaluated with reference to their credibility and carefully chosen as information sources to this thesis.
Journals and articles
There are numerous academic journals, which create the need for careful selection and assurance of the journal’s reliability. A journal that has been around for a long time is a sign of credibility, but not a certainty. It is also, like for the books, that articles that have been referred to many times is an indication of reliability.
the fact that the journals are well-known and show signs of credibility. Many of the articles referred to in this thesis have been referred to in other related academic articles and journals. The articles were found through the electronic search-engine ELIN, Harvard Business Review and as references in other related articles.
Internet Sources
When using Webpages from the Internet as sources it is important to evaluate the credibility of the information. The only Webpages used as sources in this thesis were the interviewed companies’ Webpages from which the information gathered were only used as background information that could be confirmed during the interviews.
2.2.2 Interviews
There are three main types of interviews according to Yin (1994).
Structured interviews – Where a written manuscript is strictly followed for all interviews,
where all the interviewees get identical questions.
Semi structured interviews – Where a written manuscript is prepared that can be slightly
modified during the interview.
Unstructured interviews – Where the interviewer is allowed to ask questions freely with
regards to a beforehand chosen topic.
In the beginning of this thesis a few informal interviews were held with ABB Machines employees to gain further knowledge of the sales process, the company and other general information of importance for the upcoming research.
The interviews that created the foundation for the case studies, i.e. the interviews with Volkswagen Commercial Vehicles, Scania, Solar Turbines Inc., and Siemens Industrial Turbomachinery, were all of the semi-structured type. The same interview questionnaire was used as a starting point in all interviews, but had to be modified slightly in order to suit the company interviewed.
The interviewer effect is always an issue when it comes to the reliability of the interviews. According to Denscombe (2000) the interviewer effect is when the interviewer affects the interviewee’s responses. Since reliable responses are sought the strive is to minimize this influence. Factors that can affect the interviewee are gender, age, ethnicity, and language-skills. Non of these factors can be changed which is why in the cases that the differences between the interviewer and the interviewee are significant, it is of high importance to make the interviewee feel comfortable in order to receive reliable answers. That can be arranged by being well prepared, polite and neutral as an interviewer.
thesis were face-to-face interviews in Swedish, which is why the “interviewer effect” can be considered negligible. The interview with Solar was conducted over the telephone in English, the interviewers second language, which is why the risk for the interviewer effect is slightly higher. It is however, still considered very low due to the interviewee’s and the interviewer’s experience of dealing with the English-Swedish language-barrier.
2.3 Criteria of Quality
2.3.1 Validity
To be able to determine to what extent this thesis is valid an external observer should be able to follow the different steps that led to the result. This has been made possible by explicitly presenting all the interviewees and all other sources from which information is gathered.
To further ensure the validity all the interviewees has been asked to double check the compilation and the results of the interviews to make sure that nothing is lost in translation or misinterpreted.
The number of sources is also of high importance for the validity. As many relevant sources as possible has been used in this thesis but they were however limited due to the complexity of ABB Machines situation, which limited the possible sources and also due to some companies unwillingness to contribute. The lack of time that is always an issue in these temporal researches was also a factor that limited the number of sources used. This is where the validity of this thesis can be questioned.
2.3.2 Reliability
The reliability is supposed to ensure that if a researcher follows the same procedure for the same study, the same result will be acquired. According to Denscombe (2000) the first step of achieving this is to clearly describe the aim of the research and to minimize possible errors by carefully documenting the procedure.
The purpose of this thesis is clearly stated to ensure the reliability and the procedure is described later on in this chapter.
2.4 Procedure
The initial phase of this research was to gain background knowledge and relevant information about the company that this thesis was preformed on behalf of, namely ABB Machines in Västerås. The contact person at ABB Machines in Västerås Mr. David
Bjerhag, Manager of Sales and Project Execution, helped to recommend various key persons at the company that shared their expertise and their knowledge of the company. Mr. Bjerhag also contributed personally with his view of the situation. Several sales persons at ABB Machines were interviewed to gain a better understanding of the sales process, which was essential to be able to compare to other companies’ processes.
After that short introduction it was time to create the theoretical framework for the thesis. This was done by gathering relevant information from books, journals, and articles within the carefully selected areas; product introduction, standardization, product positioning, market segmentation, line extension, customer behavior, and mass customization. The theoretical framework was not only created for the purpose to enlighten the readers, but also to find possible best practice companies that could be studied in the next phase of the thesis.
Through the gathering of information to the theoretical framework the author came across three highly relevant case studies within mass customization. These cases were analyzed and added as sort of an introduction to the next phase of this thesis, namely the case studies. The cases, which were found in a Doctorial Dissertation, were both a complement to and used for comparison to the case studies that were to be conducted by the author of this thesis.
When the three above-mentioned cases were analyzed a good foundation was created for the next phase of the thesis, the authors own case study. The initial problem at this stage was to select suitable companies to study. Seven companies were chosen due to their successful product introduction and similarity to ABB Machines’ situation either based on product, marked position, branch or other. Due to unwillingness to contribute three of the companies had to be left out of the study but however, the remaining four gladly agreed participate.
The four companies were interviewed one at the time and analyzed with regards to their processes and their ability to overcome the obstacles that ABB Machines in Västerås is facing today. The results found from the different case studies were compared to each other and analyzed. At this stage a clear picture of how a “best practice company” should act had appeared.
After the case studies were conducted and analyzed a deep and extensive analysis of ABB Machines in Västerås had to be made. Since the preferred company behavior was known, the actual company behavior was sought in order to make recommendations. The analysis of ABB Machines in Västerås was based on the author’s own experience together with informal interviews of ABB Machines employees. Various ABB Machines employees have supervised the analysis in order to ensure its accuracy.
When ABB Machines in Västerås had been analyzed both the preferred behavior and the actual behavior were known. The road from ABB Machines’ behavior today to the preferred company behavior constituted the recommendations and brought this thesis to a final result.
2.4.1 Delimitations
One issue with the introduction of the new standardized product at ABB Machines in Västerås that was left out of this thesis was the risk that the new product would cannibalize on the existing products’ volumes. The reason that this was omitted was because it was of lower economical risk than the issues that was brought up in this thesis and partly due to limitations of time. By limiting the options of the standardized product ABB Machines controls the market demand for that product and can therefore adjust the options before the situation gets out of control. It would however, be interesting for future researchers to seek an approach how to avoid cannibalization in the most effective manner.
Another issue, strongly related to the above, is to what extent the Basic generator should be sold in terms of how large part of the total sales should consist of Basic orders in the long run. The author believes that this is a question for ABB Top Management and will for that reason be left out of this thesis.
With the introduction of a new standardized product comes a potential need for new suppliers. How to select new suppliers and ensure their appropriateness is an issue of importance for product success, but is however too extensive to be covered in this thesis and is therefore left for other researchers to investigate.
2.4.2 Alternative methods
One alternative method is to divide the theoretical framework into two parts, where one is focusing on the internal communication while the other focuses on the external communication. The part that brings up the internal communication could cover how to manage the change of internal processes and how to ensure that the ABB Machines employees fully understand the new product and manages it in the most preferable way. The other part could cover the communication with the customers and how to ensure that the customers fully understand the differences between the old products that they are used to buy and the new standardized product, explain the new pricing, and explain the consequences with the lower flexibility.
This method was discussed on beforehand as a possible method of choice but was however rejected due to the fact that the focus of such a thesis risked being too heavy on organizational behavior and organizational change instead of on the problem itself that ABB Machines in Västerås needed a solution for, i.e. how to include the new standardized product into its existing product portfolio consisting of customized products.
3 Theoretical Framework
3.1 Introduction
In the theoretical framework various theories will be brought to the readers attention that each and every one will, in its own individual way, be relevant for the situation that ABB Machines in Västerås is in at the time of writing. All theories in this chapter will create a theoretical foundation that will be useful when investigating how to integrate a new standardized product into an existing product portfolio consisting of customized products. Some general theories about new product introduction will be followed by theories about product introduction in extended enterprises keeping in mind that one of ABB’s customers will be a part of the product introduction. Since the new product will be a standardized alternative based on a previous product some general theories about standardization will be brought up.
Product positioning is the next topic to be covered. It will be covered due to the fact that ABB Machines will have to position its new product correctly to be able to reach new customers, which brings us to the next topic to be covered namely market segmentation. By introducing the new product ABB Machines will try to reach new customer segments on new lower output markets where its previous products have been to expensive. The new product will also be a form of line extension, which is why theories within that subject will be covered too.
One of the author’s initial concerns was if a standardized product in any way would affect the customer behavior. Therefore, some theories regarding customer behavior will be included.
Lastly, the theoretical framework will cover some theories about mass customization. At first sight it may be difficult for the reader to understand what mass customization has to do with ABB Machines’ situation, but it is in fact highly relevant. To be able to offer the standardized product a type of mass customization is required due to the complexity of this particular product. ABB Machines’ standardized product will include a product platform with several available options and can therefore be seen as a mass customized product as well as a standardized product.
3.2 Introducing a New Product
According to M.N. Abd Rahaman and M.R. Muhamad (2004) the winning new product strategy is to use company technological strengths in pursuing new product opportunities in new markets. To be able to do that the management must understand the company’s microenvironment and macroenvironment. Such understanding is received through analyses.
3.2.1 Microenvironment analysis
A microenvironment analysis studies a company’s internal resources in terms of strengths and weaknesses. A company’s strengths should utilize while its weaknesses become the boundary condition for the strategy. Successful new product development projects are associated with quality performance either in production, technology, financial resources or marketing, according to a study by Miller (1998), which is why evaluation of internal resources and skills within these areas are critical for a relevant picture of the company’s capabilities.
3.2.2 Macroenvironment analysis
A macroenvironment analysis studies the external factors that might affect a company’s situation. This analysis will result in a scan of the industry’s environment and the competitive condition within this industry. It is important for the management that, through this analysis, receive a clear perception of the following key factors:
• The drivers of industry change • The intensity of competition • The key industry traits
• The market position and strategy of competitors • The industry future profit outlook
The results from these two analysis coupled should provide an indication on how to create a product strategy that leverage the company’s strengths through the new product and therefore creates competitiveness.
3.2.3 Should the new product strategy be market or technology driven?
From the findings of the micro- and macroenvironmental analyses the conductor will investigate if the decision is influenced by the market, i.e. a market driven strategy, or if it is influenced by the company’s technological leadership (i.e. technology driven strategy). In the strive for the strategy characteristics that increase project success Loach (2000) argued that emphasis must be put on both internal technological competencies and the market needs in defining the winning product strategy. This approach is called dual drive strategy and was proved the most successful in a study by M.N. Abd Rahaman and M.R. Muhamad (2004). Their study also showed that this was true regardless of company size.3.2.4 Key factors contributing to new product failure
Potential technical problems are a key factor. If the product is badly designed, has poor performance and quality or in another way fails to fulfill its purpose it will not be a long-lived product. Market research is also an essential factor. If insufficient or incorrect market research is performed a company may overestimate the market’s potential or misinterpret the customers’ demand (Classen and López, 1998). The timing of the market entry is also critical for the new product’s performance. If the product introduction is too hasty there is a possibility that different preparations have been rushed and are not sufficiently done. On the other hand, a late product introduction may make the company miss out on potential profit and there is also a risk that when the product is introduced the customer demand on the market is shifting, in other words, the product is introduced late in its own life cycle.
3.2.5 Importance of communication in product introduction
The importance of extensive communication and collaboration between manufacturers and suppliers during the product introduction process cannot be neglected (May and Carter, 2001). A case study performed by May and Carter showed the following three points regarding product introduction:
• There is a complexity of the collaborative relationships, both within and across company boundaries.
• There is an ad-hoc and informal nature of much of the communication and collaboration between engineers.
• There is a lack of formal procedures for interactions between different members of the supply chain.
The conclusion that communication is essential for smooth product introduction was also drawn by Classen and López (1998). Keeping these observations in mind we can see that there is an obvious need for close collaboration and communication.
3.3 Product Introduction in Extended Enterprises
3.3.1 Trust-based relationships
The extended enterprise is a new phenomenon that rose in the late 20th century. According to Dyer (2000) the extended enterprise is defined as companies working together in intimate, trust-based relationships to develop, produce and deliver complex products. Dyer argues that compared to arms-length relationships, trust-based relationships saves money, however, building such collaboration requires lots of time and commitment.
The two companies must be willing to invest in people that are dedicated to each other and share both implicit and explicit knowledge. Susman et al. (2003) argue that open communication between partners increase the degree of trust among team members, which increases their cooperative behavior.
3.3.2 Communication within extended enterprises
A key requirement for companies continued survival is tight interaction and co-ordination among all the participants in the supply chain (Azevedo and Sousa, 2000). As new forms of organizations are established, for example the extended enterprise, co-ordination of the supply chain becomes more strategically important. Therefore, integration must be from one end of the business chain to the other, i.e. from one company’s supplier all the way through to its customers (Somers and Nelson, 2003).
The use of IT is common within integrated firms to alter linkages with suppliers and customers, to establish new standards of performance in their industries and to create new services (Johnson and Carrico, 1988). However, Malhotra et al. (2001) stresses that just using IT is not enough to overcome the problems such as those which are cross-functional, cross-organizational, and cross-cultural, since these can raise conflicts that results from incompatibility between communication norms and practices. The success of an extended enterprise, such as a strategic alliance, depends on intensive information sharing, which is why it must be noted that standardized communication, which minimizes human interaction might harm two companies’ strategic advantage.
3.3.3 Collaborative tools
Collaborative technology in form of collaborative tools encompasses a variety of functions to support group work (Cooper, 2003). According to Cooper collaborative tools include “product data and document management systems that provide the capability to store, retrieve, share, and maintain configuration and version control over text- or file-based products, such as requirements documents, plans, and specifications, and often provide additional lifecycle management, traceability, or reporting features; and groupware systems that facilitate communication and coordination between team members”. Cooper also argues that a combination of collaborative technology and the strategy of designing modularized products will support collaborative product realization within an extended enterprise. This strategy can use collaborative technology supporting design in form of computer-aided design (CAD), by enabling the user to simulate their design (Cooper, 2003). In this case collaborative technology can reduce potential misunderstandings between two companies and therefore simplify the communication. To conclude the discussion regarding collaborative technology in product introduction O’Sullivan (2003) argues that earlier research has over-emphasized the technical aspects of a product, such as design rules, and neglected the non-technical aspects, the face-to-face interactions, i.e. the aspects that collaborative technology cannot replace. Therefore,
it is crucial to note that the use of collaborative technology is encouraged to facilitate face-to-face interactions but not to replace them.
3.3.4 Possible goal conflicts
When working in strategic alliances all participants must strive for a business approach that is built on reliability and respect for each other’s competence at all the levels in the organizations. However, since all participants are individuals they may focus on different goals, when it comes to product introduction. The importance of a common goal is even more vital in a strategic alliance. If the alliance fails to achieve a shared goal, there is a risk that each goal will dominate each company’s process and the differences will make it difficult to reach optimal product introduction.
Some potential differences in focus:
Designer: Production engineer:
Functionality Reuse of production processes
Robustness Short production cycle time
Specification protocols Few components Low component cost Low refinement cost
Project management: Marketing:
Low project budget Short time to market
Efficiency in work Low price
Efficiency in process Volume flexibility Short time schedules Customer satisfaction Guaranteed deliverables Attractive product design
In two case studies performed in the mechanical engineering industry by Kerstin Johansen (Linköping University 2005) there were several material suppliers and components involved in the product introduction of the redesigned product. Both these cases indicate that managing the product introduction, i.e. supporting the communication between product designers and product engineers, requires a defined, supported, and communicated process. This is particularly important when one company is responsible for the product’s design and another company handles the product introduction.
3.4 Product Positioning
Product positioning is the customer’s perceptions of a product’s attributes relative to the attributes of competitive products. Rather than allowing the customers to position ABB’s products independently, ABB must try to influence and shape customers’ perceptions in a favorable way.
24
Figure 3.4.1 The product positioning steps. Source: Ostaseviciute, Sliburyte (2008)
3.4.1 The product positioning steps
Identify the relevant set of competitive products – needs to be done in order to draw the
position frames for a product. This can be done by either a quantitative customer survey or a more qualitative approach, such as deep drawing interviews.
Table 2
Product positioning steps
Source: Grancutt, Leadley, Forsyth (2004)
Scientists Hutt, Spech (2004) suggest the following
steps in the product positioning process:
Table 3
Product positioning steps
Source: Hutt, Spech (2004)
Concentrating all discussed product positioning
models the authors of this article propose the following
algorithm of positioning process steps.
Table 4
Product positioning steps
Identification and analysis of competitive products in
the market
Drawing positioning frames for a product, category
membership should be determined first, i.e. other products
that compete in the same market and can serve as
substitutes. The best considered means for determination is
TXDQWLWDWLYH DSSURDFK ± FRQVXPHU VXUYH\ 7KLV PHWKRG
allows collecting a large amount of useful data, which is
easily systemized, adapted, processed statistically. One of
the main advantages of consumer survey is the
anonymousness. Deep interview can be also used to
determine the rival products in the market, but due to
larger time and financial costs is used seldom. Scientists
Hooley, Saunders, Piercy (2006) state that competition can
take place in the following levels:
x
Competition with products with analogous qualities
x
Competition in the same product group
x
Competition with other products that satisfy the same
or very similar consumer demand
x
Competition in the same consumer demand level
As mentioned above it is vitally important not only to
determine all products on the same shelf, but also
determine the rivals to the whole shelf.
Identification of determinant attributes and measuring
their significance to the user
After the identification and analysis of competitive
products in the market, determinant attributes should be
identified and their significance to the user should be
measured. According to Aaker, (2005) determinant
attributes define not only the products benefits and value to
the user, but also associations with the product consuming
process and with the consumer himself. The authors
Hooley, Saunders, Piery (2006) consider a qualitative
Identify and analyze competitive products
in the market
Compose the positioning map
Identify the determinant attributes and measure
their significance to the user
Identify the current position
of the product and other competing products according to
determinant attributes
Determine the desired position of the product
Select positioning or repositioning strategy
Create the positioning statement
Identify the relevant set of competitive products
Identify the set of determinant attributes
that customers use to differentiate among options
and determine the preferred choice
Collect information from a sample of existing and potential
customers concerning their ratings of each product on the
determinant attributes
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offerings for each market segment
Examine the fit between preferences of market segments and
current position of product
Identification of competitors
Singling out decision making attributes
Evaluation out of decision making
attribute significance
Identification of competitor position according to the most
important attributes
Identification of consumer needs
Preparation of a consumer map
Selection of the desired position
Selection of positioning strategy
Identify the determinant attributes and measure their significance to the user – is the next
step. According to the authors Hooley, Saunders, Piercy (2005), a qualitative approach is the most effective way to determine these attributes and therefore suggest a discussion group.
Identification of the current position of the product and other competing products according to determinant attributes – Since ABB introduces a new product that does not
have a position on the market yet this is not directly applicable. However, it is instead useful to note the position of ABB’s current product, the AMS, in order to compare and avoid cannibalization.
Composition of the positioning map – can be done with the information gathered in the
previous steps. A positioning map graphically illustrates customers’ perceptions of the competing products with based on two different attributes, for instance price and perceived quality. It is an important tool in product positioning since it enables managers to identify gaps and opportunities in the market.
Determination of the desired position of the product – It would be ideal to place the
product on the point on the positioning map that represents the combination of attributes that the customer desires the most. What the positioning company should do is to place its product as close to this point as possible and therefore offer a customer-preferred product. It is however significant to observe that according to Sheinin (1998), companies should avoid segments, where they do not possess differential advantage.
Selection of positioning or repositioning strategy – is one of the most crucial steps.
Positioning strategy is according to Doyle and Stern (2006) defined as the choice of target market segments, which determines where the business competes, and the choice of differential advantage, which dictates how it competes. Products very often fail because of initial positioning mistakes. Brooksbank (1994) states that a product may be inadequately positioned for three reasons:
• The segment in which it is targeted might have become unattractive because it is too small, declining, too competitive or otherwise unprofitable.
• Positioning might be inadequate because the quality and features that the product offers do not appeal to the segment to which it is targeted.
• It might be wrong because the product’s costs are too high to allow it to be priced competitively.
Creation of the positioning statement – is probably the most difficult element of product
positioning. From the data obtained and the positioning strategy developed it is necessary to formulate a positioning statement that is in tune with the objectives. These positioning statements provide guidance for the firm that can help the organization’s employees to understand the strategy of this product. According to Kalafatis, Tsogas, and Blankson
(2000) positioning statements play a vital role, both internally and externally, to guide and coordinate the firm’s efforts in the marketplace.
To summarize: Product positioning plays a key role when trying to reach a place in the mindsets of potential and existing customers. In the opinion of various scholars, it is obvious that product positioning is a complex, continuing, and chain process that should at least go though the above steps in order to be successful.
3.4.2 Risky Positions
Under-positioning – Some companies discover that buyers only have a vague idea of the
brand and its benefits and features. Customers may not be aware of anything particularly special about that brand.
Over-positioning – Customers may have too narrow a view of the brand. Therefore a
customer might think that a particular company only produces luxury items that retail at high prices. However, it may produce a variety of cheaper products as well.
Confused positioning – Customers could be confused about that position of the brand.
This confusion may result from the company making too many decisions about the brand or changing the brand’s position too frequently.
Doubtful positioning – Customers may find it hard to believe the claims made by the
company about its brand with regards to the individual product’s features and promoted benefits, the price and the name of the manufacturer.
(Ostaseviciute and Sliburyte, 2008)
3.4.3 Exemplar-based positioning
Exemplar-based positioning is a strategy that is used to accomplice brand consideration by direct comparisons with the market leader or another of the major players on that specific market. The similarities can be seen in either product attributes or design as long as it helps the positioned brand to be judged with reference to the comparison brand (or exemplar) and therefore creating a place for the positioned product in the potential customers consideration set.
3.4.4 Abstraction-based positioning
According to Trout and Ries (1986) head-on competition with the marked leader is not likely to succeed in many instances. With abstraction-based positioning the aim is to facilitate an entry in the potential customers consideration set without direct comparison but through association with a hypothetical brand in the category. Research indicates that if the brand successfully portrays itself as belonging to the sub-category of competitors’
brands this association will be achieved (Grewal et al., 1997; Keller, 1998).
A way of practicing abstraction-based positioning is to present all the products attributes without comparing to competitor’s products. This is particularly advantageous when there is no competitive brand that offers all the best features.
3.4.5 Reverse positioning
What ABB is trying to do is to use a positioning strategy called reverse positioning to force customers’ mental shift. By stripping product attributes while adding some new ones, for instance shorter lead time and lower cost, ABB can alter the product’s competitive environment.
3.5 Market Segmentation
Due to the necessity to balance customer needs with the capabilities and resources of competing organizations, market segmentation arises. One of the most widely cited benefits of segmentation is that it leads to a better understanding of customers’ needs and characteristics. The gained understanding can be used to develop fine tuned marketing programs and provide a greater insight into the competitive situation (Powers, 1991). Market segmentation also helps companies to identify new opportunities in under-served customer groups, which can be highly profitable.
3.5.1 Implementation problems
There are numerous different theories of why market segmentation tends to fail. According to White (1992) some of the problems arise because organizations are unfamiliar with how to handle the segmentation process. This is partly a result of that academic literature in general focus on segmentation variables and techniques while offering relatively little guidance on how to handle the process and deal with the outputs. However, some general advices about the segment’s qualities are mentioned by Kotler (1991). He argues that in order to be useful a segment must be measurable, substantial, accessible, and actionable. If a segment lacks one of above characteristics companies may find it difficult to enter that market segment.
3.5.2 The stages of market segmentation
For market segmentation to be profitable, a series of steps must be followed according to Kotler (1991). However, it seems that true market segmentation, in academic sense, is rarely used in practice. Companies instead structure their markets on historical, product-based lines. Since the academics try to identify, statistically validate and test the existence of alternatives, and the practitioners’ real test for a particular segment solution is the marketing program that must be developed, the differences in priorities can be
explained.
There are three distinct steps in an effective segmentation process (Dibb and Simkin, 1997):
(1) Marketing analysis – to gain current marketing intelligence or knowledge (2) Strategy development – to formalize ideas
(3) Marketing programs – to action the determined segmentation strategy
These three steps form a loop as in the picture below. It is important to note that in each link of the loop there are risks of process break down, which causes the segmentation to fail and the organization to revert to the existing status quo.
The three-stage analysis, strategy, and program process takes the core analyses and updates managers’ views of their business and marketplace. The understanding received from this analysis will create the platform for managers’ reexamination of which segment or segments the organizations should target. Feedback during the process is crucial to ensure that neither the analysis nor strategic thinking is lost.
The three stages of segmentation in points: Core Analysis (Now)
• The existing situation
• General trends/marketing environment
• SWOT (strengths, weaknesses, opportunities and threats) • Buyer behavior
• Competitive strategies • Product positioning
• Balance of product portfolio
geographic boundaries, is a difficult concept for many practitioners to grasp. Instead companies may structure their markets on historical, product based lines (Dibb and Simkin, 1994). The differing priorities of practitioners and academic researchers are at least partly the cause for this. While the academic seeks to identify, statistically validate and test the existence of alternative schemes, for the practitioner the real test of a particular segment solution is the marketing program which must be developed.
Even where the practitioner understands and wishes to undertake a market segmentation exercise, barriers to successful implementation may be encountered which cause the process to fail. The difficulties associated with implementing marketing strategy are not new (McDonald, 1989). Recent work by Piercy (1989; 1992), Piercy and Peattie (1988) and Bonoma (1985) draws attention to the need to identify and break down barriers to
implementation.
In the following discussion, the junctures at which the market segmentation process is susceptible to breakdown are highlighted. These occur when the desire for new ideas and up-dated marketing programs fails to overcome latent managerial inertia to create new marketing strategies and supporting programs. The simple analysis, strategy and programs (ASP) paradigm illustrated in Figure 1, builds on existing understanding of the strategic marketing planning process (Weitz and Wensley, 1988) and demonstrates the points at which breakdown can occur.
An effective segmentation process involves three distinct steps: marketing analysis to gain knowledge or current marketing intelligence; strategy development to formalize ideas; and, marketing programs to action the determined revised segmentation strategy. These three stages form a loop, as the formulation of marketing strategies, segment targeting, and marketing mix programs is a never-ending cycle of revisions. At each link in the ASP loop, however, there is the chance that the process will break down, that segmentation will fail to be implemented and that organizations revert to the less risky, existing status quo. These areas are described below and illustrated using short, descriptive case histories.
Starting out
Any segmentation process must begin with a clear appreciation of corporate objectives. This guides which broad issues are to be researched and signals areas of priority. Lack of clear objectives may cause the segmentation analysis to fail before it has properly begun. An understanding of how to objectively determine core trends is also required.
54 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 1 1997
Figure 1. The ASP model for implementing market segmentation strategy
Latent managerial inertia
Strategic thinking (The future)
• Identification of new segment criteria • Determination of new market segments • Selection of new market segments
• Determination of product positioning strategies Implementation programs (How)
• Marketing programs
o Product rage and portfolio o Pricing and payment issues o Promotional strategies and tactics o Distribution and control
o Service levels and personnel o Sales force
o Internal communications and organization • Resources and scheduling
o Budgets
o People and responsibilities o Activities • Ongoing requirements o Product development o Marketing research o Training o Communications
o Monitoring and performance
3.6 Line Extension
Line extensions consist of introducing additional items in the same product category under the same brand name. This involves risks and has provoked a heated debate among marketing professionals, about its ups and downs (Kotler, 2003). On the downside, line extensions may lead to the brand name losing its specific meaning. It is not difficult to imagine that when a high quality brand launches a low-price product the brand name is affected. This is called the line-extension trap. It can do substantial harm if the fit is inappropriate, but if it is well managed it can be an enormous benefit.
When looking at the case when Mercedes-Benz launched its low-price 190 model in the mid-1980s, a classic case of intelligent product line extension is shown. The launch made it possible for Mercedes-Benz, which was associated with luxury, to reach farther down
in the sub-luxury-buyer segments than ever before. The company took an obvious risk, namely, would the 190 model degrade the image of the established Mercedes brand? According to John Quelch and David Kenny (1994), we are supposed to think of brand image in terms of three components: maker image, producer image, and user image. Mercedes could have played it safe by introducing a new brand and positioned it as “by Mercedes”. This would have been a costly strategy, but it would have leveraged the maker image while insulating it from any possible degradation associated with offering a less prestigious car. However, that strategy would have limited the attractive features that the Mercedes 190 had and ruled out the possibility to donate them to the parent brand. This turned out to be one of the most successful line extensions ever, since Mercedes-Benz managed to reach new customer segments while keeping its reputation of being a luxury-brand. However, if Mercedes-Benz would have failed the low-price model could have seriously damaged the brand name and the customers’ perception of Mercedes-Benz as a high-end car supplier.
3.7 Customer Behavior
When a new product is about to be introduced the customer behavior must be taken into account. Since the new product is standardized it might influence the decision-making unit in the buying organization. A lower level of complexity of the product can reduce the need for a technically experienced buyer.
In general the organizational buying process involves a set of smaller decisions influenced by several individuals. The industrial salesperson must therefore address three questions when selling the new product.
• Which organizational members take part in the buying process? • What is each member’s influence in the decision?
• What criteria are important to each member in evaluating prospective suppliers? Depending on which organizational member the salesperson want to influence, he can choose to enhance different attributes of the product. In some cases a low price might be more important than a short lead time and the other way around.
Another important factor is how the new product will influence the buyer’s risk in the purchase decision. Research highlights the importance of perceived risk in shaping the structure of the decision-making. Individuals tend to make the decisions when the perceived risk is low, while higher risk decisions generates the following:
• The buying centre becomes larger and comprises members with high levels of organizational status and authority.
